10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 01-07284

Baldor Electric Company

Exact name of registrant as specified in its charter

Missouri	43-0168840
State or other jurisdiction of incorporation or organization	IRS Employer Identification No.
5711 R. S. Boreham, Jr. St Fort Smith, Arkansas	72901
Address of principal executive offices	Zip Code

479-646-4711

Registrant’s telephone number, including area code

Securities registered pursuant to section 12(b) of the Act:

Title of Class	Name of each exchange on which registered
Common Stock, $0.10 Par Value	New York Stock Exchange
Common Stock Purchase Rights	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant based on the closing price on July 2, 2005, was $695,472,894.

At February 25, 2006, there were 33,110,338 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the fiscal year ended December 31, 2005 (the “2005 Annual Report to Shareholders”), are incorporated by reference into Part I and Part II.

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 2006 (the “2006 Proxy Statement”), are incorporated by reference into Part III.

TABLE OF CONTENTS

				Page
PART I
	Item 1	-	Business	3
			Forward-looking Statements	3
			General	3
			Products	3
			Sales and marketing	4
			Competition	4
			Manufacturing	4
			Research and engineering	4
			Environment	4
			Employees	5
			Executive officers of the registrant	5
			International sales	5
			Access to filings on Company website	5
	Item 1A	-	Risk Factors	5
	Item 1B	-	Unresolved Staff Comments	6
	Item 2	-	Properties	7
	Item 3	-	Legal Proceedings	7
	Item 4	-	Submission of Matters to a Vote of Security Holders	7
PART II
	Item 5	-	Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	8
	Item 6	-	Selected Financial Data	9
	Item 7	-	Management’s Discussion and Analysis of Financial Condition and Results of Operation	9
	Item 7A	-	Quantitative and Qualitative Disclosures about Market Risk	9
	Item 8	-	Financial Statements and Supplementary Data	9
	Item 9	-	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	9
	Item 9A	-	Controls and Procedures	10
	Item 9B	-	Other Information	10
PART III
	Item 10	-	Directors and Executive Officers of the Registrant	11
	Item 11	-	Executive Compensation	11
	Item 12	-	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	12
	Item 13	-	Certain Relationships and Related Transactions	12
	Item 14	-	Principal Accountant Fees and Services	12
PART IV
	Item 15	-	Exhibits, Financial Statement Schedules	13
SIGNATURES				14
POWER OF ATTORNEY				14
SCHEDULE II				16
INDEX OF EXHIBITS				17

PART I

Item 1. Business

Forward-looking Statements

This annual report and other written reports and oral statements made from time to time by Baldor and its representatives may contain forward-looking statements. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as “believe”, “could”, “may”, “potential”, “will”, “expect”, “anticipate”, “continue”, “becomes”, “would”, “projected”, “forecasted”, “estimate”, or any grammatical forms of these words) are based on the management’s current expectations and some of them are subject to risks and uncertainties, including but not limited to those risk factors identified in Item 1A. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, but are not limited to, the following: (i) changes in economic conditions, (ii) developments or new initiatives by our competitors in the markets in which we compete, (iii) fluctuations in the costs of select raw materials, (iv) the success in increasing sales and maintaining or improving operating margins, and (v) other factors including those identified in the Baldor’s filings made from time to time with the Securities and Exchange Commission.

General

Baldor Electric Company (“Baldor” or the “Company”) was incorporated in Missouri in 1920. The Company operates in the electric motor, drive and generator segment of the electrical equipment industry. Baldor has made several small acquisitions; however, the majority of its growth has come internally through broadening its markets and product lines.

Products

The AC motor product line presently ranges in size from 1/50 up to 1500 horsepower. The DC motor product line presently ranges from 1/50 through 800 horsepower. The adjustable speed controls product line ranges from 1/50 to 900 horsepower. The Company’s industrial control products include servo products, DC controls, position controls, and inverter and vector drives. With these products, the Company provides its customers the ability to purchase a “drive” from one manufacturer. Baldor defines a “drive” as an industrial motor and an electronic control. The Company’s power generator line ranges from 1.3 kilowatts to 2000 kilowatts. Sales of industrial electric motors represented approximately 78% of the Company’s business in 2005, 76% in 2004, and 78% in 2003. Almost all of the remaining sales were comprised of power generators, drives, speed reducers, industrial grinders, buffers, polishing lathes, stampings, castings, and repair parts.

Baldor’s industrial products are designed, manufactured, and marketed for general purpose uses (“stock products”) and to individual customer requirements and specifications (“custom products”). Stock products represented approximately 61% of total product sales in 2005, 60% in 2004, and 62% in 2003. Most stock product sales are to customers who place their orders for immediate shipment from current inventory. Custom products generally are shipped within two weeks from the date of order.

- 3 -

Sales and Marketing

The products of the Company are marketed throughout the United States and in more than 60 foreign countries. The Company’s field sales organization, comprised of independent manufacturer’s representatives and Company sales personnel, consists of more than 70 locations. There are 43 locations in North America and the rest of the Company’s representatives are located in various parts of the world including Europe, Latin America, Australia, India, and the Far East.

Custom products and stock products are sold to original equipment manufacturers (“OEMs”) and to independent distributors for resale, often as replacement components in industrial machinery that is being modernized or upgraded for improved performance.

Competition

The Company faces substantial competition in all markets served. Some of the Company’s competitors are larger in size or are divisions of large diversified companies and have substantially greater financial resources. The Company competes by providing its customers better value through product quality and efficiency and better services, including product availability, shorter lead-times, on-time delivery, local support, product literature, and training.

The Company is not aware of any industry-wide statistics from which it can precisely determine its relative position in the industrial electric motor industry. In the United States certain industry statistics are available from the U.S. Department of Commerce and the National Electrical Manufacturers Association. However, these sources do not include all competitors or all sizes of motors. The Company believes that its share of the domestic market has increased over the past several years.

Manufacturing

The Company manufactures many of the components used in its products, including laminations, stamped steel parts, and aluminum die castings. Manufacturing many of its own components permits the Company to better manage cost, quality, and availability. In addition to manufacturing components, the Company’s motor manufacturing operations include machining, welding, winding, assembling, and finishing operations.

The raw materials necessary for the Company’s manufacturing operations are available from several sources. These materials include steel, copper wire, gray iron castings, aluminum, insulating materials, electronic components, and combustion engines. Many of these materials are purchased from more than one supplier. The Company believes that alternative sources are available for such materials.

Research and Engineering

The Company’s design and development of electric motors, drives and generators include both the development of products, which extend the product lines, and the modification of existing products to meet new application requirements. Additional development work is done to improve production methods. Costs associated with research, new product development, and product and cost improvements are expensed when incurred and amounted to approximately $24.4 million in 2005, $25.4 million in 2004, and $21.9 million in 2003.

Environment

Compliance with laws relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on capital expenditures, earnings, or the financial position of the Company and is not expected to have a material effect in the future.

- 4 -

Employees

As of February 25, 2006, the Company had 3,841employees.

Executive Officers of the Registrant

Information regarding executive officers is contained in Part III, Item 10, and incorporated herein by reference.

International Sales

International sales (foreign affiliates and exports) were approximately 14% of total sales in 2005, 16% of total sales in 2004, and 15% of total sales in 2003. Additional information about international sales contained in the 2005 Annual Report to Shareholders under the caption “Note J – Foreign Operations” is incorporated herein by reference. The majority of international sales are from products produced in the United States and exported.

The Company’s products are distributed in more than 60 foreign countries, principally in Canada, Mexico, Europe, Australia, the Far East, and Latin America. Baldor’s wholly-owned affiliate, Baldor UK Ltd., has sales offices and a development and manufacturing facility in the UK. Baldor and its affiliates in Europe have sales offices in Germany and Switzerland. The Company also wholly owns Australian Baldor Pty. Limited that has locations in Sydney and Melbourne. The Company wholly owns Baldor Electric (Asia) Pte. Ltd. located in Singapore and Baldor Japan Corporation located in Yokohama, Japan, and has sales offices in Taiwan, Korea, and China. The Company also wholly owns Baldor de Mexico, S.A. de C.V. located in Leon, Mexico.

The Company believes that it is in a position to act on global opportunities as they become available. The Company also believes that there are additional risks attendant to international operations, including currency fluctuations and possible restrictions on the movement of funds. However, these risks have not had a significant effect on the Company’s business.

Access to Filings on Company Website

The Company makes available its Forms 10-K, 10-Q, 8-K, and amendments thereto, on its corporate website when filed with the SEC. These filings, along with the Company’s Annual Reports to Shareholders, Proxy Statements, Code of Ethics for Certain Executives, and certain other corporate governance documents may be viewed online free of charge by accessing the Company’s website at www.baldor.com and selecting the Investor Relations section.

Item 1A. Risk Factors

The most significant risk factors related to the Company’s business are as follows:

1. The Company’s future results are subject to fluctuations in the price of raw materials. The principal raw materials used to produce our products are steel, copper and aluminum. The prices of those raw materials are susceptible to significant fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, price controls, economic conditions and other unforeseen circumstances. If the Company is unable to mitigate raw materials price increases through product design improvements, price increases to its customers, and hedging transactions, future profitability could be adversely affected.

- 5 -

2. The Company’s future results may be impacted by the effects of, and changes in, worldwide economic conditions. The Company’s business may be adversely affected by factors in the United States and other countries that are beyond its control, such as an economic downturn in a specific country or region, or in the various industries the Company serves; social or political conditions in a specific country or region; or potential adverse changes in tax laws in the jurisdictions in which the Company operates.

3. The Company’s results are affected by competitive conditions and customer preferences. The Company operates in markets that are highly competitive. Some of the Company’s competitors are larger in size or are divisions of large diversified company’s and have substantially greater financial resources. Demand for the Company’s products may be affected by the Company’s ability to introduce new, redesigned, and customized products to meet changing customer expectations and requirements; the Company’s ability to respond timely to downward pricing pressure to stay competitive; and changes in customer order patterns.

4. The Company’s future results may be affected by various legal and regulatory proceedings, including those involving product liability, antitrust, environmental or other matters. The Company from time to time is party to legal and regulatory proceedings in the normal course of business. The outcome of legal proceedings could differ from the Company’s expectations since the outcomes of litigation, including regulatory matters, are sometimes difficult to predict. As a result, the Company could be required to change current estimates of liabilities as litigation matters develop. Changes in these estimates could have an adverse affect on the Company’s results of operations.

5. The Company’s total assets include goodwill. If the Company determines that goodwill has become impaired in the future, net income could be adversely affected. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. The Company reviews goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the results of operations. A reduction in net income resulting from the write down or impairment of goodwill could have a material adverse affect on the Company’s financial results.

6. The Company’s future results may be affected by environmental, health and safety laws, and regulations. The Company is subject to various laws and regulations relating to the protection of the environment and human health and safety and has incurred and will continue to incur capital and other expenditures to comply with those regulations. Failure to comply with certain regulations could subject the Company to future liabilities, fines or penalties or the suspension of production. In addition the Company incurs, in the normal course of business, various remediation expenses related to its manufacturing sites, none of which is expected to be material. If remediation obligations were to increase beyond the Company’s expectations or if the Company incurred fines, penalties, or suspension of production, future results could be adversely affected.

Item 1B. Unresolved Staff Comments

There are no unresolved written SEC staff comments regarding our periodic or current reports under the Securities Exchange Act of 1934.

- 6 -

Item 2. Properties

The Company believes that its facilities, including equipment and machinery, are in good condition, suitable for current operations, adequately maintained and insured, and capable of sufficient additional production levels. The following table contains information with respect to the Company’s properties.

LOCATION	PRIMARY USE	AREA (SQ. FT.)
Fort Smith, AR	AC motor production	384,969
	Distribution and service center	208,000
	Administration and engineering offices	79,675
	Aluminum die casting	79,330
	Drives production center	162,000
St. Louis, MO	Metal stamping and engineering toolroom	187,385
Columbus, MS	AC motor production	156,000	(a)
Westville, OK	AC and DC motor production	207,250
Fort Mill, SC	DC motor, AC motor, and tachometer production	108,000
Clarksville, AR	Subfractional AC and DC motors, gear motors, worm-gear speed reducers, and tachometer production	165,735	(a)
Ozark, AR	AC motor production	151,783
Four other domestic locations	Metal stamping and motor, drives, and generator production	256,400
15 foreign locations	Sales and distribution centers and electronic controls production	117,579	(b)
		2,264,106

(a) This property is leased.

(b) Of this amount, approximately 90,000 sq. ft. is leased.

The Company also has approximately 350,000 sq. ft. of space available for expansion, currently fully leased to outside firms.

Item 3. Legal Proceedings

The Company is party to a number of legal proceedings incidental to its business, none of which is deemed to be material to its operations or business.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

- 7 -

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Information under the captions “Ticker”, “Dividends Paid”, “Common Stock Price Range”, and “Shareholders” of the 2005 Annual Report to Shareholders, is incorporated herein by reference. Information about equity compensation plans not approved by security holders contained in the 2005 Annual Report to Shareholders under the caption “Note I - Stock Plans” is incorporated herein by reference. The following table contains information regarding the number of shares of common stock that may be issued pursuant to the Company’s equity compensation plans as of December 31, 2005.

Equity Compensation Plan Information

Plan Category	(a) Number of securities to be issued upon exercise of outstanding options, warrants, and rights	(b) Weighted- average exercise price of outstanding options, warrants, and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity Compensation plans approved by security holders	2,392,243	$	20.83	571,154
Equity compensation plans not approved by security holders	104,052	$	22.29	97,691
Total	2,496,295	$	20.89	668,845

On November 11, 2003, the Company publicly announced the approval of a share repurchase program that authorized the repurchase of up to three million shares between January 1, 2004, and December 31, 2008. During the three months ended December 31, 2005, the Company repurchased shares of the Company’s common stock in open-market transactions as summarized in the table below.

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares (or Units) Purchased (1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
Month #10
Oct 2, 2005 – Oct 29, 2005	47,200	$	24.39	45,000	2,842,000
Month #11
Oct 30, 2005 – Nov 26, 2005	79,244	$	25.13	55,000	2,787,000
Month #12
Nov 27, 2005 – Dec 31, 2005	100,820	$	26.15	87,231	2,699,769
Total	227,264	$	25.43	187,231	2,699,769

(1) Includes shares repurchased through open-market transactions pursuant to Baldor’s share repurchase program, private repurchase transactions, and shares received from trades for payment of the exercise price or tax liability on stock option exercises.

- 8 -

During the fourth quarter of 2005, certain District Managers exercised non-qualified stock options previously granted to them under the Baldor Electric Company 1990 Stock Option Plan for District Managers (the “DM Plan”). The exercise price paid by the District Managers equaled the fair market value on the date of the grant. The total amount of shares granted under the DM Plan is approximately 1% of the outstanding shares of Baldor common stock. None of the transactions were registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the exemption from registration afforded by Section 4(2) of the Act. The Company deems this exemption to be appropriate given that there are a limited number of participants in the DM Plan and all parties are knowledgeable about the Company.

Item 6. Selected Financial Data

Information concerning net sales, net earnings, net earnings per share, dividends per share, long-term obligations, and total assets for the years ended 1995 through 2005 is contained under the caption “Eleven-Year Summary of Financial Data” of the 2005 Annual Report to Shareholders and is incorporated herein by reference.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2005 Annual Report to Shareholders is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Information under the sub-caption “Market Risk” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2005 Annual Report to Shareholders is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of the Company under the captions “Consolidated Balance Sheets”, “Consolidated Statements of Earnings”, Consolidated Statements of Cash Flows”, and Consolidated Statements of Shareholders’ Equity”, and related “Notes to Consolidated Financial Statements” of the 2005 Annual Report to Shareholders are incorporated herein by reference. Also incorporated herein by reference from the 2005 Annual Report to Shareholders is the information found under captions “Report of Independent Registered Public Accounting Firm”, “Report of Management on Responsibility for Financial Reporting”, and the “Summary of Quarterly Results of Operations (Unaudited)”.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not Applicable.

- 9 -

Item 9A. Controls and Procedures

Disclosures Controls and Procedures

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management in a timely manner. The Company, under the supervision and with the participation of management, including the principal executive officer and principal financial officer evaluated as of December 31, 2005, the effectiveness of this system of disclosure controls and procedures, and has concluded that such disclosure controls and procedures were effective as of that date.

Internal Control Over Financial Reporting

Management’s assessment, and the attestation report of the Company’s independent registered public accounting firm, of the effectiveness of the Company’s internal control over financial reporting are incorporated herein by reference from the “Report of Management on Internal Control over Financial Reporting” of the 2005 Annual Report to Shareholders and “Report of Independent Registered Public Accounting Firm” of the 2005 Annual Report to Shareholders.

Changes in Internal Control Over Financial Reporting

There have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect those controls subsequent to the date of management’s assessment.

Item 9B. Other Information

On November 6, 2005, the Company approved a Bonus Plan for Executive Officers to be implemented for the Company’s fiscal year 2006. The participants in this Bonus Plan will be the executive officers of the Company for fiscal year 2006. The formula used in the Bonus Plan is comprised of two independent components. Each component provides 50% of the bonus. Component 1 is based on the Company’s sales plan for fiscal year 2006 and Component 2 is based on the Company’s pre-tax earnings plan for fiscal year 2006.

- 10 -

PART III

Item 10. Directors and Executive Officers of the Registrant

Information contained in the 2006 Proxy Statement under the captions “Proposal 1 - Election of Directors”, “Code of Ethics”, “Statement of Director Independence”, “Statement of Audit Committee Member Independence and Financial Expertise”, and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference. The current executive officers of the Company, each of whom is elected for a term of one year or until his successor is elected and qualified, are:

Name	Age	Position	Served as Officer Since
John A. McFarland	54	Chairman and Chief Executive Officer	1990
Ronald E. Tucker	48	President, Chief Financial Officer and Secretary	1997
Randall P. Breaux	43	Vice President – Marketing	2001
Roger V. Bullock	56	Vice President – Drives	2002
Randy L. Colip	47	Vice President – Sales	1997
Charles H. Cramer	61	Vice President – Human Resources	1984
Gene J. Hagedorn	59	Vice President – Materials	1994
Jeffrey R. Hubert	52	Vice President – Sales	2002
Tracy L. Long	40	Vice President – Investor Relations and Assistant Secretary	2003
L. Edward Ralston	36	Vice President – Finance and Treasurer	2005
Ronald W. Thurman	51	Vice President – Engineering	2005
Randal G. Waltman	56	Vice President – Operations	1997

Each of the executive officers has served as an officer or in a management capacity with the Company for the last five years except for Jeffrey R. Hubert. Mr. Hubert joined Baldor in July 2001 as the Company’s Director of Business Development. Prior to joining Baldor, Mr. Hubert spent 15 years in the motor business in various areas of sales, marketing, customer service, and application engineering. There are no family relationships among the directors or executive officers.

Item 11. Executive Compensation

Information contained in the 2006 Proxy Statement under the caption “Executive Compensation”, except for the information contained in the sub-captions “Board Report on Executive Compensation” and “Performance Graph”, is incorporated herein by reference. Information contained in the 2006 Proxy Statement under the caption “Proposal 1 – Election of Directors” paragraph headed “Director Compensation” is also incorporated herein by reference.

- 11 -

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The security ownership by officers, directors, and beneficial owners of more than five percent of the Company’s Common Stock included under the caption “Security Ownership of Certain Beneficial Owners and Management” of the 2006 Proxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Certain relationships and related transactions included under the caption “Compensation Committee Interlocks and Insider Participation” of the 2006 Proxy Statement is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information contained in the 2006 Proxy Statement under the caption “Independent Registered Public Accounting Firm” is incorporated herein by reference.

- 12 -

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)	(1)	The following consolidated financial statements of Baldor Electric Company and its Affiliates, included in the 2005 Annual Report to Shareholders, are incorporated by reference in Item 8 of this Report:
		•      Consolidated Balance Sheets         - December 31, 2005 and January 1, 2005
		•      Consolidated Statements of Earnings         - for each of the three years in the period ended December 31, 2005
		•      Consolidated Statements of Cash Flows         - for each of the three years in the period ended December 31, 2005
		•      Consolidated Statements of Shareholders’ Equity         - for each of the three years in the period ended December 31, 2005
		•      Notes to Consolidated Financial Statements
	(2)	The following consolidated financial statement schedule of Baldor Electric Company and its Affiliates is included in Item 15(c) of this Report:
		•      Schedule II Valuation and Qualifying Accounts
		All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable.
	(3)	See Exhibit Index at pages 16-18 of this Report.
(b)	Exhibits
	See Exhibit Index at pages 16-18 of this Report.
(c)	Financial Statement Schedules
	The response to this portion of Item 15 is submitted as a separate section of this Report at page 16 hereof.

- 13 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

BALDOR ELECTRIC COMPANY
(Registrant)
By	/s/John A. McFarland
	John A. McFarland
	Chairman and Chief Executive Officer
	(Principal Executive Officer)

Date: March 9, 2006

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John A. McFarland and Ronald E. Tucker, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Report and any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.

- 14 -

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant, and in the capacities and on the dates indicated.

SIGNATURE PAGE FOR FORM 10-K FOR YEAR ENDED DECEMBER 31, 2005.

Signature	Title	Date
/s/ John A. McFarland	Chairman,	March 9, 2006
John A. McFarland	Chief Executive Officer, and
	Director
	(Principal Executive Officer)
/s/ Ronald E. Tucker	President,	March 9, 2006
Ronald E. Tucker	Chief Financial Officer and
	Secretary
	(Principal Financial Officer)
	(Principal Accounting Officer)
/s/ Jefferson W. Asher, Jr.	Director	March 9, 2006
Jefferson W. Asher, Jr.
/s/ Merlin J. Augustine, Jr.	Director	March 9, 2006
Merlin J. Augustine, Jr.
/s/ Richard E. Jaudes	Director	March 9, 2006
Richard E. Jaudes
/s/ Robert J. Messey	Director	March 9, 2006
Robert J. Messey
/s/ Robert L. Proost	Director	March 9, 2006
Robert L. Proost
/s/ R. L. Qualls	Director	March 9, 2006
R. L. Qualls
/s/ Barry K. Rogstad	Director	March 9, 2006
Barry K. Rogstad

- 15 -

BALDOR ELECTRIC COMPANY AND AFFILIATES

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

Column A	Column B		Column C			Column D			Column E
Description	Balance at Beginning of Period		Additions			Deductions			Balance at End of Period
			Charged to Costs and Expenses		Charged to Other Accounts
Deducted from current assets:
Allowance for doubtful accounts
2005	$	3,308	$	201		$	385	(A)	$	3,124
2004	$	3,870	$	—		$	562	(A)	$	3,308
2003	$	4,031	$	450		$	611	(A)	$	3,870

(A) Uncollectible accounts written off (net of recoveries) during year.

- 16 -

BALDOR ELECTRIC COMPANY AND AFFILIATES

INDEX OF EXHIBITS

Exhibit No.		Description
3(i)	*	Articles of Incorporation (as restated and amended) of Baldor Electric Company, effective May 2, 1998, filed as Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.
3(ii)	*	Bylaws of Baldor Electric Company (as restated and amended February 7, 2005).
4(i).1	*	Rights Agreement, dated May 6, 1998, between Baldor Electric Company and Wachovia Bank of North Carolina, N.A. (formerly Wachovia Bank & Trust Company, N.A.), as Rights Agent, originally filed as Exhibit 1 to the Registrant’s Current Report on Form 8-K dated May 13, 1988, and refiled as Exhibit 4(i) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994.
4(i).2	*	Amendment Number 1 to the Rights Agreement, dated February 5, 1996, filed as Exhibit 2 to the Registrant’s Registration Statement on Form 8-A/A dated March 21, 1996.
4(i).3	*	Amendment Number 2 to the Rights Agreement, dated June 1, 1999, filed as Exhibit 4(i)(c) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 1999.
10(iii).1	* †	Officers Compensation Plan, originally filed as Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for year ended December 31, 1988, and refiled as Exhibit 10(iii)(A)(2) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994.
10(iii).2	* †	1987 Incentive Stock Plan, originally filed as Appendix A to Registrant’s Proxy Statement dated April 3, 1987, and refiled as Exhibit 10(iii)(A)(3) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994.
10(iii).3	* †	1989 Stock Option Plan for Non-Employee Directors, as restated and amended at the Board of Directors Meeting on August 10, 1998, filed as Exhibit 10(iii)A.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.
10(iii).4	* †	1994 Incentive Stock Option Plan, as restated and amended at the Company’s Annual Meeting on May 2, 1998, filed as Exhibit 10(iii)A.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.

(continued on next page)

- 17 -

BALDOR ELECTRIC COMPANY AND AFFILIATES

INDEX OF EXHIBITS

(continued from previous page)

Exhibit No.		Description
10(iii).5	* †	1996 Stock Option Plan for Non-Employee Directors, as restated and amended at the Board of Directors Meeting on August 10, 1998, filed as Exhibit 10(iii)A.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.
10(iii).6	* †	Stock Option Plan for Non-Employee Directors, as approved by the Company’s Board of Directors on February 5, 2001, filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2001.
10(iii).7	* †	Bonus Plan for Executive Officers, as approved by the Company’s Compensation Committee of the Board of Directors on November 7, 2004, and the Company’s Board of Directors on November 8, 2004, and filed as Exhibit 10(iii).7 to the Registrant’s Annual Report on Form 10-K for the year ended January 1, 2005.
10(iii).8	†	Bonus Plan for Executive Officers, as approved by the Company’s Compensation & Stock Option Committee of the Board of Directors on November 5, 2005, and the Company’s Board of Directors on November 6, 2005, and filed as Exhibit 10(iii).8 hereto.
11		Computation of Earnings Per Share, incorporated by reference from caption “Note H – Earnings Per Share” of the 2005 Annual Report to Shareholders filed as Exhibit 13.
13		Portions of the 2005 Annual Report to Shareholders. The Annual Report is being filed as an exhibit solely for the purpose of incorporating certain provisions thereof by reference. Portions of the Annual Report not specifically incorporated are not deemed “filed” for the purposes of the Securities Exchange Act of 1934, as amended.
21		Subsidiaries of the Registrant.
23(i)		Consent of Independent Registered Public Accounting Firm.
24		Powers of Attorney (set forth on signature page hereto).
31.1		Certification by Chief Executive Officer
		Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by Chief Financial Officer
		Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(continued on next page)

- 18 -

BALDOR ELECTRIC COMPANY AND AFFILIATES

INDEX OF EXHIBITS

(continued from previous page)

Exhibit No.	Description
32	Certifications
	Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99	Not applicable

The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments defining the rights of the holders of long-term debt of the Registrant and its consolidated affiliates.

* Previously filed.

† Management contract or compensatory plan or arrangement.

- 19 -

EX-10.(III).8

EXHIBIT 10(iii).8

BALDOR ELECTRIC COMPANY

BONUS PLAN FOR EXECUTIVE OFFICERS

PLAN ADMINISTRATION

The Board of Directors of the Company (the “Administrator”) has sole responsibility for installation, review, and revision of the Plan and all its provisions, at their discretion, including year-to-year implementation of the plan.

PLAN PARTICIPANTS

Participants include the “Executive Officers” of the Company as designated by the Board of Directors. Participation in the Plan does not constitute a guarantee of employment and incentive awards for plan participants whose employment is terminated for any reason may forfeit their rights to the “Bonus”. Participants who retire or go on disability during the plan year will receive a prorated portion of their bonus earned.

BONUS PAYMENT DATE

The bonus will be paid in a lump sum as soon as practical after the Company’s financial results for the applicable year have been certified by the outside auditors.

BONUS FORMULA FOR THE YEAR

The formula used in the Plan is based on the Company’s Sales and Profit Plan (“Company Plan”) for each year the Plan is implemented. The formula is constructed so a bonus (using the percentage as defined below) of base compensation, will be paid on a component when that component’s goal of the approved Company Plan is met. The formula will have two independent components as specified below.

BONUS FORMULA		Company Plan			Stretch
Component 1	Sales	$	tbd		$	tbd
	Bonus based on sales goals		5.0	%		10.0	%
Component 2	Pre-tax earnings	$	tbd		$	tbd
	Bonus based on financial performance		5.0	%		10.0	%
	EPS	$	tbd		$	tbd

Component 1 – Sales Goals

The sales component will provide 50% of the Bonus Formula. For sales below Company Plan, no bonus is earned. For sales at or above Company Plan, the bonus will be paid on a straight line pro-rata basis based on the percentages indicated as “Stretch”.

Component 2 – Financial Performance

The pre-tax earnings component will provide 50% of the Bonus Formula. For pre-tax earnings below Company Plan, no bonus is earned. For pre-tax earnings at or above Company Plan, the bonus will be paid on a straight line basis on the percentages indicated as “Stretch”.

EX-13

EXHIBIT 13

Eleven-Year Summary of Financial Data

	Net Sales		Cost of Goods Sold		Net Earnings		Per Share Data						Percent Return On Average Equity		Shareholders’ Equity		Total Assets		Long-Term Obligations		Debt to Total Capitalization
(In thousands, except percentages and per share data)							Diluted Net Earnings		Basic Net Earnings		Dividends
2005	$	721,569	$	519,840	$	43,021	$	1.28	$	1.30	$	0.62	14.8	%	$	299,455	$	504,602	$	70,025	19.0	%
2004		648,195		473,752		35,052		1.05		1.06		0.57	12.9	%		283,615		501,560		104,025	26.8	%
2003		561,391		409,294		24,779		0.74		0.75		0.53	9.2	%		261,488		476,955		79,465	23.3	%
2002		549,507		396,815		23,895		0.69		0.70		0.52	8.9	%		274,598		472,761		105,285	27.7	%
2001		557,459		401,471		22,385		0.65		0.66		0.52	8.6	%		262,485		457,527		98,673	27.3	%
2000		621,242		423,861		46,263		1.34		1.36		0.50	17.6	%		260,845		464,978		99,832	27.7	%
1999		585,551		399,833		43,723		1.19		1.21		0.45	16.5	%		266,109		423,941		56,305	17.5	%
1998		596,660		410,748		44,610		1.17		1.21		0.40	17.6	%		264,292		411,926		57,015	17.7	%
1997		564,756		389,711		40,365		1.09		1.13		0.36	18.2	%		243,434		355,889		27,929	10.3	%
1996		508,526		353,345		35,173		0.97		1.00		0.30	17.1	%		200,325		325,486		45,027	18.4	%
1995		478,315		334,306		32,305		0.84		0.88		0.26	16.3	%		211,377		313,462		25,255	10.7	%

Exhibit 13 – Page 1

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This annual report and other written reports and oral statements made from time to time by Baldor and its representatives may contain forward-looking statements. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as “believe”, “could”, “may”, “potential”, “will”, “expect”, “anticipate”, “continue”, “becomes”, “would”, “projected”, “forecasted”, “estimate”, or any grammatical forms of these words) are based on the management’s current expectations and some of them are subject to risks and uncertainties. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, but are not limited to, the following: (i) changes in economic conditions, (ii) developments or new initiatives by our competitors in the markets in which we compete, (iii) fluctuations in the costs of select raw materials, (iv) the success in increasing sales and maintaining or improving operating margins, and (v) other factors including those identified in the Baldor’s filings made from time to time with the Securities and Exchange Commission.

Results of Operations

Baldor had another strong year of sales growth in 2005. Total sales increased 11.3% to a record $721.6 million. While raw materials prices continued to increase during the year, we were able to mitigate their effects with continued improvements in manufacturing efficiencies and a modest price increase. During 2005 we relocated our linear motor manufacturing to Fort Smith, resulting in significant manufacturing efficiencies in that product line. In addition, we continue to gain leverage of selling and administrative overhead expenses by supporting sales growth without the addition of significant overhead. As a result of solid top line growth, manufacturing efficiencies and leverage of overhead, our gross and operating margins improved over those of 2004. Net earnings rose 22.7% to $43.0 million in 2005 and diluted earnings per share were up 21.8% to $1.28. International sales initiatives continued to show results in 2005, with record international sales and improved profitability in our international affiliates. Strong operating results and cash flows allowed us to reduce debt, repurchase stock, invest in manufacturing equipment, and increase dividends paid to our shareholders. Baldor serves many industries and geographic regions by selling to a broad base of distributors and Original Equipment Manufacturers (OEMs) both domestically and in more than 60 countries around the world. Total sales were allocated approximately 50% each to distributors and OEMs for all years presented in this report.

2005 compared to 2004

Total sales for 2005 increased 11.3% to $721.6 million, compared to sales of $648.2 million in 2004. Sales of industrial electric motor products grew 14.3% during 2005 and that growth was spread among most of the industries and geographical areas we serve. Large motors (60-1500 horsepower) and Super-E® high-efficiency motors in all sizes had the strongest growth in 2005. As energy costs have increased, our Super-E high-efficiency motors have become increasingly valuable to our industrial users. Industrial electric motors comprised 78.3% of total product sales in 2005 compared to 76.2% in 2004. During 2005, sales of generator products rose 16.5% from 2004 levels and comprised 7.0% of total product sales in 2005 compared to 6.7% in 2004. While a portion of the growth was related to the need for alternate power in areas affected by the hurricanes, we saw substantial growth in a number of customer markets. Sales of drives and motion control products declined 3.9% in 2005, following strong growth in 2004.

Exhibit 13 – Page 2

During 2005, we completed development of new motion control products and the first phase of our H2® series of drives. We expect the availability of these new products to result in steady growth in the drives and motion control product lines in 2006. Drive products accounted for 14.7% of total product sales in 2005 and 17.1% in 2004.

Gross margin was 28.0% in 2005 compared to 26.9% in 2004. During 2005, copper prices reached record highs, driving up the cost of our materials. A continued focus on product design improvements, along with a modest price increase on our products, helped to mitigate the effects of increased material costs. Those initiatives combined with improved manufacturing efficiencies and increased sales volume accounted for most of the improvement in gross margin for 2005. During 2005 we adjusted certain self-insurance liabilities to reflect current exposures, resulting in an increase in the gross margin of 0.5% of sales.

Operating margin for 2005 improved to 10.9% from 9.3% in 2004. Selling and administrative expenses decreased to 17.1% of sales in 2005 compared to 17.6% in 2004. During 2005 we did not add substantial fixed selling and administrative costs. As a result, total selling and administrative expenses for 2005 declined as a percentage of sales. Our ability to support increased 2005 sales volume without the addition of significant overhead, along with the product design improvements and manufacturing efficiencies, resulted in improved operating margin.

Pre-tax margin improved to 9.3% for 2005 from 8.1% in 2004. Interest rates on outstanding long-term debt facilities increased during 2005. In response, we utilized a portion of operating cash flows to reduce our debt by approximately $9.0 million. While we incurred more interest expense than in 2004, we reduced our exposure to continued rising rates with the reduction of a portion of our variable rate debt. Net earnings for 2005 of $43.0 million were up 22.7% from 2004 earnings of $35.1 million. Diluted earnings per share grew by 21.8% to $1.28 compared to $1.05 in 2004. Adjustments to our self-insurance liabilities during the fourth quarter of 2005 increased diluted EPS by $0.04 per share. In addition, income tax liabilities were adjusted in the fourth quarter of 2005 due to resolution of certain state tax liabilities, resulting in an increase in diluted EPS of $0.01 per share. These adjustments compared to adjustments of income tax liabilities made in the fourth quarter of 2004 amounting to $0.06 per diluted share.

2004 compared to 2003

Total sales for 2004 were $648.2 million, rising 15.5% above 2003 net sales of $561.4 million. Sales of electric motors increased 13.5% in 2004 and amounted to 76.2% of total product sales compared to 77.5% in 2003. Sales of drives products were up 15.7% for the year and amounted to 17.1% of total product sales in 2004 compared to 17.0% in 2003. Sales of generator products rose 41.8% during the year and comprised 6.7% of total product sales versus 5.5% in 2003.

Gross margin of 26.9% in 2004 declined from 27.1% in 2003. During 2004, raw material costs increased sharply and although productivity and product design improvements and price increases mitigated much of the effects of increased copper and steel costs, gross margin suffered during 2004.

Operating margin of 9.3% in 2004 was an increase over 2003 operating margin of 8.2%. Most of the 2004 improvement resulted from our ability to support a 15.5% increase in 2004 total sales without adding fixed selling and administrative costs. Selling and administrative costs were 17.6% of sales in 2004 compared to 18.9% in 2003. During the fourth quarter of 2004, certain contingent liabilities were adjusted by approximately $1.5 million to reflect current exposures, resulting in a reduction in selling and administrative expenses of 0.2% of sales.

While increased material costs in 2004 had a negative effect on the 2004 gross margin, efficiencies in selling and administrative costs combined with increased sales volume resulted in a pre-tax margin of 8.1% for 2004 compared to 7.0% in 2003. Net earnings increased to $35.1 million, or $1.05 per diluted share, in 2004 compared to $24.8 million, or $0.74 per diluted

Exhibit 13 – Page 3

share, in 2003. During the fourth quarter of 2004, certain accrued income tax liabilities were adjusted to reflect current exposure, resulting in an increase in earnings of $0.06 per diluted share.

International Sales: International sales (foreign affiliates and exports) increased 2.0% in 2005 to a record $103.1 million compared to $101.1 million in 2004 and $82.8 million in 2003. In 2005, our export sales from the U.S. to non-affiliate customers increased 17.1% or $7.9 million. Sales from our European affiliates to foreign customers declined 10.0% primarily due to general business conditions in Europe and the anticipated availability in early 2006 of new motion control products. We expect to see steady growth in the motion control products during 2006.

Environmental Remediation: Management believes, based on its internal reviews and other factors, that any future costs relating to environmental remediation and compliance will not have a material effect on the capital expenditures, earnings, cash flows, or competitive position of the Company.

Financial Position

The Company’s financial position remained strong through 2005. We continued to increase our financial strength while investing in research and development for new and existing products, making capital investments in our manufacturing facilities and information systems, expanding into new markets, and continuing to invest in both our employees’ and customers’ education and training. We believe the investment in our employees through training and education is a key to continued success and improved shareholder value. Investments in property, plant and equipment, and information systems amounted to $22.4 million in 2005, $20.6 million in 2004, and $17.4 million in 2003. These investments were made primarily to improve quality and productivity. The Company’s commitment to research and development continues to help us maintain a leadership position in the marketplace and satisfy customers’ needs. Investments in research and development amounted to $24.4 million in 2005, $25.4 million in 2004, and $21.9 million in 2003. We continue to make investments in new product development as well as in existing products for improved performance, increased energy efficiency, and manufacturability.

Liquidity and Capital Resources: Our liquidity position remained solid in 2005. Working capital amounted to $189.0 million at December 31, 2005, and $213.1 million at January 1, 2005. The ratio of current assets to current liabilities was 2.8 to 1 at year-end 2005, compared to 3.5 to 1 at the end of fiscal year 2004. The decrease in working capital and current ratio in 2005 was primarily related to reclassification of $25.0 million of long-term debt due to mature in 2006.

Liquidity was supported by cash flows from operations of $55.9 million in 2005, $33.7 million in 2004, and $65.0 million in 2003. While the increase in sales in 2005 required an investment in accounts receivable, we were able to reduce the average number of days it takes to collect our accounts. This accounted for $14.5 million of the improvement in operating cash flows in 2005 compared to 2004. In addition, we increased our inventory turns, which allowed us to reduce our inventory by $4.1 million during the year without affecting customer deliveries. The decrease in inventory contributed an additional $13.5 million in operating cash flows when compared to 2004. In addition, approximately $3.3 million of generator inventory, classified in other assets, was transferred to our rental program in 2005 with no resulting effect on cash flows. Accounts payable used $12.1 million more operating cash in 2005 than in 2004, primarily due to differences in the timing of cash disbursements between the two years. In 2005, we utilized operating cash flows to fund property, plant and equipment additions of $22.4 million, pay dividends to our shareholders of $20.6 million, repurchase approximately 300,000 shares of our common stock for $7.6 million, and acquire the remaining minority interest in our Australian affiliate for $2.4 million. During 2004, operating cash flows and accumulated cash were utilized to fund property, plant and equipment additions of $20.6 million and pay dividends to our shareholders of $19.1 million. In 2003, we utilized operating cash flows and accumulated cash

Exhibit 13 – Page 4

to fund property, plant and equipment additions of $17.4 million, pay dividends to our shareholders of $17.5 million, repurchase 1.5 million shares of our common stock for $26.7 million, and acquire Energy Dynamics, Inc. for $5.8 million.

Total long-term debt, including amounts classified as current maturities, was $95.0 million at December 31, 2005, compared to $104.0 million at January 1, 2005. Management expects that amounts maturing in 2006 will be renewed, unless it becomes advantageous to repay those amounts. Baldor’s credit agreements contain various financial covenants, and we were in compliance with those covenants during all of the periods presented in this report.

Baldor’s principal source of liquidity is operating cash flows. Accordingly, we are dependent primarily on continued demand for our products as well as collectability of receivables from our customers. Our broad base of customers, industries and geographic areas served, as well as our favorable position in the marketplace, ensure that fluctuations in a particular customer’s or industry’s business will not have a material effect on our sales or collectability of receivables. As a result, management expects that our foreseeable cash needs for operations and capital expenditures will continue to be met through operating cash flows and existing credit facilities.

The table below summarizes Baldor’s contractual obligations as of December 31, 2005.

(In thousands)	Total		Payments due by years
			Less than 1		1 - 3		3 - 5		More than 5
Contractual Obligations:
Long-term debt obligations (a)	$	101,831	$	29,132	$	54,823	$	15,663	$	2,213
Operating lease obligations		14,025		1,990		4,262		3,618		4,155
Other Commercial Commitments:
Letters of Credit		2,257		2,257		—		—		—

(a) Includes interest on both fixed and variable rate obligations. Interest associated with variable rate obligations is based upon interest rates in effect at December 31, 2005. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.

Dividend Policy: Dividends paid to shareholders amounted to $0.62 per share in 2005 and $0.57 per share in 2004. There have been three dividend increases in the last five years and 10 increases in the last 10 years. These increases were in line with Baldor’s policy of making increases periodically, as earnings and financial strength warrant. The objective is for shareholders to obtain dividend increases over time while also participating in the growth of the Company.

Market Risk: Market risks relating to Baldor’s operations result primarily from changes in commodity prices, interest rates, concentrations of credit, and foreign exchange rates. To maintain stable pricing for our customers, we enter into various hedging transactions as described below.

Baldor is a purchaser of certain commodities, primarily copper, aluminum, and steel, and periodically utilizes commodity futures and options for hedging purposes to reduce the effects of changing commodity prices. Generally, contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts that are highly effective at meeting this risk reduction and correlation criteria are recorded using hedge accounting. At December 31, 2005, and January 1, 2005, all of our open positions were designated as cash flow hedges. The underlying commodities hedged have a correlation to price changes of the derivative positions such that the values of the commodidites hedged based on differences between commitment prices and market prices and the value of the derivative positions used to hedge these commodity obligations are inversely correlated.

Exhibit 13 – Page 5

Management has determined that a hypothetical 10% change in the fair value of open positions would not have a material effect on the Company’s results of operations.

Our interest rate risk is related to available-for-sale securities and long-term debt. Due to the short-term nature of the securities portfolio, anticipated interest rate risk is not considered material. Our debt obligations include certain notes payable to banks bearing interest at a quarterly variable rate. We manage our interest rate risk exposure by maintaining a mix of fixed and variable rates for debt. A 1.0% increase in variable borrowing rates would not have a material effect on Baldor’s consolidated balance sheets, results of operations, or cash flows.

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Cash equivalents are in high quality securities placed with major banks and financial institutions. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas. We perform periodic credit evaluations of our customers’ financial conditions and generally do not require collateral. No single customer represents more than 10% of net accounts receivable. Foreign affiliates generally conduct business in their respective local currencies which minimizes our foreign currency risk. We do not anticipate the use of derivatives for managing foreign currency risk, but continue to monitor the effects of foreign currency exchange rates.

Critical Accounting Policies

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Management believes the following are the critical accounting policies, which could have the most significant effect on Baldor’s reported results and require subjective or complex judgments by management.

Revenue Recognition: We sell products to our customers FOB shipping point. Title passes to the customer when the product is shipped. Accordingly, revenue is recognized when the product is shipped. Baldor has no further obligations associated with the product sale that would impact revenue recognition after the product is shipped.

Allowance for Doubtful Accounts: We record allowances for doubtful accounts based on customer-specific analysis, general matters such as current assessments of past due balances and economic conditions, and historical experience. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than anticipated, or for customer-specific circumstances, such as financial difficulty.

Inventories: Inventories are valued at the lower of cost or market, with cost being determined principally by the last-in, first-out (LIFO) method, except for non-U.S. inventories, which are determined by the first-in, first-out (FIFO) method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. The net realizable value of inventory is reviewed on an on-going basis, with consideration given to deterioration, obsolescence, and other factors. If actual market conditions differ from those projected by management, adjustments to inventory values may be required.

Self-Insurance Liabilities: Baldor’s self-insurance programs primarily include product liability, workers’ compensation, and health. We self-insure from the first dollar of loss up to specified retention levels. Eligible losses in excess of self-insurance retention levels and up to stated limits of liability are covered by policies purchased from third-party insurers. The aggregate self-insurance liability is estimated using claims experience and risk exposure levels for the periods being valued and current conditions. Adjustments to the self-insurance liabilities may be required to reflect emerging claims experience and other factors.

Exhibit 13 – Page 6

Goodwill: Goodwill and intangible assets with indefinite useful lives are tested at least annually for impairment. Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Goodwill is evaluated for impairment by first comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. Management utilizes a discounted cash flow analysis to determine the estimated fair value of our reporting units. Judgments and assumptions related to revenue, gross margin, operating expenses, interest, capital expenditures, cash flow, and market assumptions are inherent in these estimates. As a result, use of alternate judgments and/or assumptions could result in a fair value that differs from our estimate and ultimately results in the recognition of impairment charges in the financial statements. We utilize various assumption scenarios and assign probabilities to each of these scenarios in our discounted cash flow analysis. The results of the discounted cash flow analysis are then compared to the carrying value of the reporting unit. If the carrying value of a reporting unit exceeds its fair value, a computation of the implied fair value of goodwill is compared with its related carrying value. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact our results of operations and financial position. We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant an additional analysis.

Recently Issued Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (the “FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs”. SFAS 151 is an amendment of Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing”. Among other items, SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In accordance with SFAS 151, such items must be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” and allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. Baldor is required to adopt SFAS 151 no later than January 1, 2006. Management does not expect the adoption of SFAS 151 to have a significant impact on our financial statements.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS 123(R) is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. Among other items, SFAS 123(R) eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. In accordance with SFAS 123(R), the cost will be based on the grant-date fair value of the award and will be recognized over the period for which an employee is required to provide service in exchange for the award. Baldor will adopt SFAS 123(R) on a modified prospective basis beginning January 1, 2006. While we are currently evaluating the impact SFAS 123(R) will have on our financial results, we do not expect the impact to differ materially from the pro forma disclosures currently required by SFAS 123 and described herein under “Stock-based Compensation”.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS 154 replaces APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. Among other items, SFAS 154 applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Baldor is required to adopt SFAS 154 no later than January 1, 2006. Management does not expect the adoption of SFAS 154 to have a significant impact on our financial statements.

Exhibit 13 – Page 7

Consolidated Balance Sheets

Baldor Electric Company and Affiliates

(In thousands, except share data)	December 31 2005			January 1 2005
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,474		$	12,054
Marketable securities		32,592			32,392
Receivables, less allowances for doubtful accounts of $3,124 in 2005 and $3,308 in 2004		104,488			101,088
Inventories:
Finished products		76,632			81,078
Work in process		12,670			12,239
Raw materials		60,401			59,732
		149,703			153,049
LIFO valuation adjustment		(35,607	)		(31,544	)
		114,096			121,505
Prepaid expenses		4,482			3,920
Other current assets and deferred income taxes		27,485			26,786
TOTAL CURRENT ASSETS		294,617			297,745
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements		6,813			6,126
Buildings and improvements		56,980			60,179
Machinery and equipment		320,340			303,281
Allowances for depreciation and amortization		(243,838	)		(232,376	)
NET PROPERTY, PLANT AND EQUIPMENT		140,295			137,210
OTHER ASSETS:
Goodwill		63,043			62,785
Other		6,647			3,820
TOTAL ASSETS	$	504,602		$	501,560
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	37,036		$	39,075
Employee compensation		9,201			7,825
Profit sharing		8,938			6,885
Accrued warranty costs		5,584			6,335
Accrued insurance obligations		7,421			11,613
Other accrued expenses		7,187			6,037
Dividends payable		5,295			4,959
Income taxes payable		—			1,871
Current maturities of long-term obligations		25,000			—
TOTAL CURRENT LIABILITIES		105,662			84,600
LONG-TERM OBLIGATIONS		70,025			104,025
OTHER LIABILITIES		393			—
DEFERRED INCOME TAXES		29,067			29,320
SHAREHOLDERS’ EQUITY:
Preferred stock, $0.10 par value
Authorized shares: 5,000,000
Issued and outstanding shares: None
Common stock, $0.10 par value
Authorized shares: 150,000,000
Issued:           2005 - 40,807,250        2004 - - 40,423,054		4,081			4,042
Outstanding: 2005 - 33,073,438        2004 - 33,109,762
Additional capital		68,562			61,117
Retained earnings		377,154			354,696
Accumulated other comprehensive (loss) income		(2,390	)		1,050
Treasury stock: 2005 - 7,733,812    2004 - 7,313,292		(147,952	)		(137,290	)
TOTAL SHAREHOLDERS’ EQUITY		299,455			283,615
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	504,602		$	501,560

See notes to consolidated financial statements.

Exhibit 13 – Page 8

Consolidated Statements of Earnings

Baldor Electric Company and Affiliates

	Year Ended
(In thousands, except share and per share data)	December 31 2005		January 1 2005		January 3 2004
Net sales	$	721,569	$	648,195	$	561,391
Cost of goods sold		519,840		473,752		409,294
Gross Profit		201,729		174,443		152,097
Selling and administrative		123,392		113,933		106,343
Operating Profit		78,337		60,510		45,754
Other income, net		1,976		1,938		1,960
Profit sharing		8,938		6,885		5,436
Interest		4,080		3,235		2,949
Earnings before income taxes		67,295		52,328		39,329
Income taxes		24,274		17,276		14,550
NET EARNINGS	$	43,021	$	35,052	$	24,779
Net earnings per share-basic	$	1.30	$	1.06	$	0.75
Net earnings per share-diluted	$	1.28	$	1.05	$	0.74
Weighted average shares outstanding-basic		33,170,241		32,953,382		32,928,369
Weighted average shares outstanding-diluted		33,727,946		33,485,261		33,404,733
Dividends declared and paid per common share	$	0.62	$	0.57	$	0.53

See notes to consolidated financial statements.

Exhibit 13 – Page 9

Summary of Quarterly Results of Operations (Unaudited)

Baldor Electric Company and Affiliates

	Quarter								Total
(In thousands, except per share data)	First		Second (2)		Third		Fourth (3)
2005:
Net sales	$	170,596	$	178,292	$	190,019	$	182,662	$	721,569
Gross profit		46,411		48,661		52,822		53,835		201,729
Net earnings		9,022		9,712		11,161		13,126		43,021
Net earnings per share-basic		0.27		0.29		0.34		0.40		1.30
Net earnings per share-diluted		0.27		0.29		0.33		0.39		1.28
2004:
Net sales	$	152,823	$	163,695	$	168,832	$	162,845	$	648,195
Gross profit		42,188		44,616		44,739		42,900		174,443
Net earnings		7,439		8,472		8,731		10,410		35,052
Net earnings per share-basic		0.23		0.26		0.26		0.31		1.06
(1)      Net earnings per share-diluted		0.22		0.25		0.26		0.31		1.05

⁽¹⁾ The sum of the quarter amounts does not agree to the total due to rounding.

⁽²⁾ Second quarter 2005 includes self-insurance liability adjustments of $(775,000), net of tax.

⁽³⁾ Fourth quarter 2005 includes income tax adjustments of $(353,000) and self-insurance liability adjustments of $(1.3) million, net of tax. Fourth quarter 2004 includes income tax adjustments of $(2.1) million and contingency reserve adjustments of $(838,000), net of tax.

Exhibit 13 – Page 10

Consolidated Statements of Cash Flows

Baldor Electric Company and Affiliates

	Year Ended
(In thousands)	December 31 2005			January 1 2005			January 3 2004
Operating activities:
Net earnings	$	43,021		$	35,052		$	24,779
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Gains) losses on sales of assets		(550	)		165			(94	)
Depreciation		16,178			17,271			17,180
Amortization		2,063			1,872			1,659
Deferred income taxes		3,351			583			8,909
Changes in operating assets and liabilities:
(Increase) decrease in receivables		(3,400	)		(17,888	)		1,408
Decrease (increase) in inventories		4,094			(9,382	)		2,561
(Increase) decrease in other current assets		(5,871	)		235			(1,593	)
(Decrease) increase in accounts payable		(2,039	)		10,109			3,242
(Decrease) increase in accrued expenses and other liabilities		(28	)		169			(2,227	)
(Decrease) increase in income taxes payable		(1,871	)		(5,709	)		3,640
Other - net		925			1,219			5,543
Net cash provided by operating activities		55,873			33,696			65,007
Investing activities:
Additions to property, plant and equipment		(22,375	)		(20,612	)		(17,368	)
Proceeds from sale of property, plant and equipment		2,015			—			—
Marketable securities purchased		(14,476	)		(29,176	)		(39,152	)
Marketable securities sold		13,547			33,024			29,516
Acquisitions (net of cash acquired)		(2,423	)		—			(5,831	)
Net cash used in investing activities		(23,712	)		(16,764	)		(32,835	)
Financing activities:
Additional long-term obligations		—			43,000			—
Reduction of long-term obligations		(9,000	)		(44,259	)		(3,898	)
Unexpended debt proceeds		—			396			2
Dividends paid		(20,563	)		(19,052	)		(17,518	)
Common stock repurchased		(7,557	)		—			(26,686	)
Stock option plans		4,379			4,402			2,048
Net cash used in financing activities		(32,741	)		(15,513	)		(46,052	)
Net (decrease) increase in cash and cash equivalents		(580	)		1,419			(13,880	)
Beginning cash and cash equivalents		12,054			10,635			24,515
Ending cash and cash equivalents	$	11,474		$	12,054		$	10,635

Noncash items:

Inventory transferred to other assets, for rental, amounted to $3.3 million in 2005.

See notes to consolidated financial statements.

Exhibit 13 – Page 11

Consolidated Statements of Shareholders’ Equity

Baldor Electric Company and Affiliates

	Common Stock			Additional Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock (at cost)			Total
(Table data in thousands)	Shares	Amount
BALANCE AT DECEMBER 29, 2002	39,693	$	3,969	$	48,657	$	331,373		$	(4,880	)	$	(104,521	)	$	274,598
Comprehensive income
Net earnings							24,779									24,779
Other comprehensive income (loss)
Securities valuation adjustment, net of tax benefits of $85,000										(145	)					(145	)
Translation adjustments										2,809						2,809
Derivative unrealized gain adjustment, net of tax expense of $985,000										1,541						1,541
Total other comprehensive income																4,205
Total comprehensive income																28,984
Stock option plans (net of 134,890 shares exchanged and $321,000 tax benefit)	325		33		5,026								(3,011	)		2,048
Cash dividends at $0.53 per share							(17,518	)								(17,518	)
Acquisition							62									62
Common stock repurchased (1,500,000 shares)													(26,686	)		(26,686	)
BALANCE AT JANUARY 3, 2004	40,018	$	4,002	$	53,683	$	338,696		$	(675	)	$	(134,218	)	$	261,488
Comprehensive income
Net earnings							35,052									35,052
Other comprehensive income (loss)
Securities valuation adjustment, net of tax benefits of $92,000										(157	)					(157	)
Translation adjustments										1,746						1,746
Derivative unrealized gain adjustment, net of tax expense of $87,000										136						136
Total other comprehensive income																1,725
Total comprehensive income																36,777
Stock option plans (net of 124,769 shares exchanged and $630,000 tax benefit)	405		40		7,434								(3,072	)		4,402
Cash dividends at $0.57 per share							(19,052	)								(19,052	)
BALANCE AT JANUARY 1, 2005	40,423	$	4,042	$	61,117	$	354,696		$	1,050		$	(137,290	)	$	283,615
Comprehensive income
Net earnings							43,021									43,021
Other comprehensive income (loss)
Securities valuation adjustment, net of tax benefits of $245,000										(418	)					(418	)
Translation adjustments										(1,978	)					(1,978	)
Derivative unrealized loss adjustment, net of tax benefits of $667,000										(1,044	)					(1,044	)
Total other comprehensive income																(3,440	)
Total comprehensive income																39,581
Stock option plans (net of 120,289 shares exchanged and $494,000 tax benefit)	384		39		7,445								(3,105	)		4,379
Cash dividends at $0.62 per share							(20,563	)								(20,563	)
Common stock repurchased (300,231 shares)													(7,557	)		(7,557	)
BALANCE AT DECEMBER 31, 2005	40,807	$	4,081	$	68,562	$	377,154		$	(2,390	)	$	(147,952	)	$	299,455

See notes to consolidated financial statements.

Exhibit 13 – Page 12

Notes to Consolidated Financial Statements

Baldor Electric Company and Affiliates

December 31, 2005

NOTE A SIGNIFICANT ACCOUNTING POLICIES

Line of Business: The Company operates in one industry segment that includes the design, manufacture and sale of industrial electric motors, drives and generators. The products of the Company are marketed throughout the United States and in more than 60 foreign countries.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Consolidation: The consolidated financial statements include the accounts of the Company and all its affiliates. Intercompany accounts and transactions have been eliminated in consolidation. The Company does not have any investments in, or contractual arrangements with, any variable interest entities.

Fiscal Year: The Company’s fiscal year ends on the Saturday nearest to December 31, which results in a 52-week or 53-week year. Fiscal year 2005 contained 52 weeks. Fiscal year 2004 contained 52 weeks, and fiscal year 2003 contained 53 weeks.

Cash Equivalents: Cash equivalents consist of highly liquid investments having original maturities of three months or less.

Marketable Securities: All marketable securities are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. Those securities are stated at estimated fair value based upon market quotes. Unrealized gains and losses, net of tax, are computed on the basis of specific identification and are included in accumulated other comprehensive income. Realized gains, realized losses, and declines in value, judged to be other than temporary, are included in other income. The cost of securities sold is based on the specific identification method and interest earned is included in other income.

Accounts Receivable: Trade receivables are recorded in the balance sheet at outstanding principal, adjusted for charge-offs and allowances for doubtful accounts. Allowances for doubtful accounts are recorded based on customer-specific analysis, general matters such as current assessments of past due balances and economic conditions, and historical experience. Concentrations of credit risk with respect to receivables are limited due to the large number of customers and their dispersion across geographic areas. No single customer represents greater than 10% of net accounts receivable at December 31, 2005, and January 1, 2005.

Inventories: The Company values inventories at the lower of cost or market, with cost being determined principally by the last-in, first-out method (LIFO), except for $13.4 million in 2005 and $16.8 million in 2004, at foreign locations, valued by the first-in, first-out method (FIFO).

Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets ranging from 10 to 39 years for buildings and improvements and 3 to 15 years for machinery and equipment. Capitalized software costs amounting to $24.6 million and $24.8 million, net of accumulated amortization, at December 31, 2005, and January 1, 2005, respectively, are included in machinery and equipment and are amortized over their estimated useful life of 15 years. Costs associated with repairs and maintenance are expensed as incurred.

Exhibit 13 – Page 13

Fair Value of Financial Instruments: The Company’s methods and assumptions used to estimate the fair value of financial instruments include quoted market prices for marketable securities and discounted cash flow analysis for fixed rate long-term debt. The Company estimates that the fair value of its financial instruments approximates carrying value at December 31, 2005, and January 1, 2005. The carrying amounts of cash and cash equivalents, receivables, and trade payables approximated fair value at December 31, 2005, and January 1, 2005, due to the short-term maturities of these instruments.

Self-Insurance Liabilities: The Company’s self-insurance programs include primarily product liability, workers’ compensation, and health. The Company self-insures from the first dollar of loss up to specified retention levels. Eligible losses in excess of self-insurance retention levels and up to stated limits of liability are covered by policies purchased from third-party insurers. The aggregate self-insurance liability is estimated using the Company’s claims experience and risk exposure levels for the periods being valued and current conditions. Certain self-insurance liabilities were reduced by approximately $3.5 million in 2005 to reflect changes in expected liabilities. Further adjustments to the self-insurance liabilities may be required to reflect emerging claims experience and other factors.

Goodwill: Goodwill and intangible assets with indefinite useful lives are tested at least annually for impairment. Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Goodwill is evaluated for impairment by first comparing management’s estimate of the fair value of a reporting unit with its carrying value, including goodwill. Management utilizes a discounted cash flow analysis to determine the estimated fair value of the Company’s reporting units. Judgments and assumptions related to revenue, gross margin, operating expenses, interest, capital expenditures, cash flow, and market assumptions are inherent in these estimates. As a result, use of alternate judgments and/or assumptions could result in a fair value that differs from management’s estimate and ultimately results in the recognition of impairment charges in the financial statements. The Company utilizes various assumption scenarios and assigns probabilities to each of these scenarios in the discounted cash flow analysis. The results of the discounted cash flow analysis are then compared to the carrying value of the reporting unit. If the carrying value of a reporting unit exceeds its fair value, a computation of the implied fair value of goodwill is compared with its related carrying value. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact the Company’s results of operations and financial position. The annual analysis is performed during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant an additional analysis. The 2005 and 2004 annual impairment tests resulted in no impairment.

Long-Lived Assets: Impairment losses are recognized on long-lived assets when information indicates the carrying amount of these assets will not be recovered through future operations or sale.

Derivatives: The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is a cash flow hedge, changes in the fair value are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. If a hedge transaction is terminated, any unrealized gain (loss) at the date of termination is carried in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings in the period of change. The ineffective portion of the Company’s cash flow hedges was not material during the years 2005, 2004, and 2003.

Exhibit 13 – Page 14

Benefit Plans: The Company has a profit-sharing plan covering most employees with more than two years of service. The Company contributes 12% of pre-tax earnings of participating companies to the Plan.

Income Taxes: Income taxes are provided based on the liability method of accounting. Deferred income taxes are provided for the expected future tax consequences of temporary differences between the basis of assets and liabilities reported for financial and tax purposes.

Research and Engineering: Costs associated with research, new product development, and product and cost improvements are treated as expenses when incurred and amounted to approximately $24.4 million in 2005, $25.4 million in 2004, and $21.9 million in 2003.

Shipping and Handling Costs: The Company classifies all amounts billed to customers for shipping and handling as revenue and classifies gross shipping and handling costs paid as selling expense. Costs included in selling and administrative expenses related to shipping and handling amounted to approximately $25.8 million in 2005, $22.8 million in 2004, and $20.9 million in 2003.

Revenue Recognition: The Company sells products to its customers FOB shipping point. Title passes to the customer when the product is shipped. Accordingly, revenue is recognized when the product is shipped. The Company has no further obligations associated with the product sale that would impact revenue recognition after the product is shipped.

Earnings Per Share: Basic earnings per share is based upon the weighted average number of common shares outstanding and diluted earnings per share includes all dilutive common stock equivalents.

Stock-Based Compensation: The Company has certain stock-based employee compensation plans, which are described more fully in Note I. In accounting for these plans, the Company applies the intrinsic value method permitted under Statements of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.

SFAS 123 requires pro forma disclosure of the effects on net income and earnings per share as if the fair value method of valuing stock-based compensation was applied. The following table sets forth the pro forma disclosure of net income and earnings per share using the Black-Scholes option-pricing model. For purposes of this disclosure, the estimated fair value of options is amortized over the applicable compensatory periods.

Exhibit 13 – Page 15

Pro Forma Information (In thousands except per share data)

2005
Net income, as reported				$	43,021
Add:	Stock-based compensation expense included in reported net income, net of tax effects				831
Less:	Stock-based compensation expense determined under fair value method, net of related tax effects				(1,654	)
Pro forma net income				$	42,198
		Basic		Diluted
Earnings per share:
Reported		$	1.30	$	1.28
Pro forma		$	1.27	$	1.25
2004
Net income, as reported				$	35,052
Add:	Stock-based compensation expense included in reported net income, net of tax effects				161
Less:	Stock-based compensation expense determined under fair value method, net of related tax effects				(632	)
Pro forma net income				$	34,581
		Basic		Diluted
Earnings per share:
Reported		$	1.06	$	1.05
Pro forma		$	1.05	$	1.03
2003
Net income, as reported				$	24,779
Add:	Stock-based compensation expense included in reported net income, net of tax effects				446
Less:	Stock-based compensation expense determined under fair value method, net of related tax effects				(807	)
Pro forma net income				$	24,418
		Basic		Diluted
Earnings per share:
Reported		$	0.75	$	0.74
Pro forma		$	0.74	$	0.73

Product Warranties: The Company accrues for product warranty claims based on historical experience and the expected costs to provide warranty service. Changes in the carrying amount of product warranty reserves are as follows:

(In thousands)	December 31, 2005			January 1, 2005
Balance at beginning of year	$	6,335		$	6,625
Charges to costs and expenses		5,027			5,486
Deductions		(5,778	)		(5,776	)
Balance at end of year	$	5,584		$	6,335

Amounts included in selling and administrative costs amounted to $5.0 million in 2005, $5.5 million in 2004, and $6.3 million in 2003.

Exhibit 13 – Page 16

Foreign Currency Translation: Assets and liabilities of foreign affiliates are translated into U.S. dollars at year-end exchange rates. Income statement items are generally translated at average exchange rates prevailing during the period. Translation adjustments, including those related to intercompany advances that are of a long-term investment nature, are recorded in accumulated other comprehensive income (loss) in shareholders’ equity.

Reclassifications: Certain prior year amounts have been reclassified to conform to current year presentation.

NOTE B FINANCIAL DERIVATIVES

The Company uses derivative financial instruments to reduce its exposure to various market risks. The Company does not regularly engage in speculative transactions, nor does the Company regularly hold or issue financial instruments for trading purposes. Generally, contract terms of the financial instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation and are recorded using hedge accounting. Instruments that do not meet the criteria for hedge accounting are marked to fair value with unrealized gains or losses reported currently in earnings.

The Company had derivative contracts related to cash flow hedges, with a fair value of $0.9 million and $2.6 million recorded in other current assets at December 31, 2005, and January 1, 2005, respectively.

The amount recognized in cost of sales on cash flow hedges amounted to approximately $(4.7 million) in both 2005 and 2004. The Company expects that after-tax gains, totaling approximately $0.6 million recorded in accumulated other comprehensive income (loss) at December 31, 2005, related to cash flow hedges, will be recognized in cost of sales within the next twelve months. The Company generally does not hedge anticipated transactions beyond 18 months.

NOTE C MARKETABLE SECURITIES

Baldor currently invests in only high-quality, short-term investments, which it classifies as available-for-sale. Differences between amortized cost and estimated fair value at December 31, 2005, and January 1, 2005, are not material and are included in accumulated other comprehensive income (loss). Because investments are predominantly short-term and are generally allowed to mature, realized gains and losses for both years have been minimal. The following table presents the estimated fair value breakdown of investments by category:

(In thousands)	December 31, 2005		January 1, 2005
Municipal debt securities	$	18,531	$	18,865
U.S. corporate debt securities		2,081		1,696
U.S. Treasury & agency securities		11,980		11,831
Other debt securities		4,957		1,412
		37,549		33,804
Less cash equivalents		4,957		1,412
	$	32,592	$	32,392

The estimated fair value of marketable securities at December 31, 2005, was $5.2 million due in one year or less, $19.0 million due in one to five years, $10.8 million due in five to ten years, and $2.5 million due after ten years. Estimated fair value was based on contractual maturities. Expected maturities and contractual maturities are generally the same.

Exhibit 13 – Page 17

In evaluating the Company’s unrealized loss positions for other-than-temporary impairment, management considers the credit quality of the issuer, the nature and cause of the unrealized loss and the severity and duration of the impairments. At December 31, 2005, and January 1, 2005, management determined that substantially all of its unrealized losses were the result of fluctuations in interest rates and did not reflect deteriorations of the credit quality of the investments. Accordingly, management believes that its unrealized losses on investment securities are temporary in nature, and the Company has both the ability and intent to hold these investments until maturity or until such time as fair value recovers above amortized cost.

The table below shows gross unrealized losses and estimated fair value of available-for-sale investment securities, aggregated by investment category and length of time that individual investment securities have been in a continuous unrealized loss position:

	December 31, 2005
	Less than 12 months				12 months or more				Total
(In thousands)	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
U.S. corporate debt securities	$	854	$	96	$	1,227	$	122	$	2,081	$	218
Obligations of states and political subdivisions		8,383		110		9,765		257		18,148		367
Securities of U.S. Government agencies		4,442		62		7,538		212		11,980		274
Total temporarily impaired securities	$	13,679	$	268	$	18,530	$	591	$	32,209	$	859
	January 1, 2005
	Less than 12 months				12 months or more				Total
(In thousands)	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
U.S. corporate debt securities	$	1,446	$	28	$	—	$	—	$	1,446	$	28
Obligations of states and political subdivisions		7,059		320		4,993		78		12,052		398
Securities of U.S. Government agencies		4,771		29		3,947		54		8,718		83
Total temporarily impaired securities	$	13,276	$	377	$	8,940	$	132	$	22,216	$	509

NOTE D INCOME TAXES

The Company made income tax payments of $22.8 million in 2005, $21.9 million in 2004, and $1.8 million in 2003. Income tax expense consists of the following:

(In thousands)	2005		2004		2003
Current:
Federal	$	16,925	$	13,056	$	3,908
State		3,651		2,968		1,456
Foreign		347		669		277
		20,923		16,693		5,641
Deferred:
Federal		2,675		46		8,418
State		676		537		491
Foreign		—		—		—
		3,351		583		8,909
	$	24,274	$	17,276	$	14,550

Exhibit 13 – Page 18

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The sources of these differences relate primarily to depreciation, certain liabilities and bad debt expense.

The following table reconciles the difference between the Company’s effective income tax rate and the federal corporate statutory rate:

	2005		2004		2003
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	4.2	%	4.4	%	3.3	%
Other	(3.1	)%	(6.4	)%	(1.3	)%
Effective income tax rate	36.1	%	33.0	%	37.0	%

The Company adjusted certain income tax liabilities during the fourth quarter of 2005 and 2004 to reflect current exposure. These adjustments amounted to approximately $0.4 million in 2005 and $2.1 million in 2004 and accounted for the reduction in effective income tax rate for each year, respectively. The adjustments are included in “Other” in the above reconciliation.

The principal components of deferred tax assets (liabilities) are as follows:

(In thousands)	December 31, 2005			January 1, 2005
Accrued liabilities	$	2,970		$	3,653
Bad debt reserves		811			900
Foreign net operating losses		1,249			1,382
Employee compensation and benefits		—			898
Securities valuation		317			—
		5,347			6,833
Valuation allowance		(388	)		(388	)
Deferred tax assets		4,959			6,445
Property, plant, equipment and intangibles		(28,276	)		(27,295	)
Employee compensation and benefits		(916	)		—
Derivative unrealized (gains) losses		(366	)		(1,033	)
Securities valuation		—			(70	)
Deferred tax liabilities		(29,558	)		(28,398	)
Net deferred tax liabilities	$	(24,599	)	$	(21,953	)

Valuation allowance of $0.4 million is to adjust foreign net operating loss carryforwards to expected future utilization.

The Company has accumulated but undistributed earnings of foreign subsidiaries aggregating approximately $8.8 million at December 31, 2005, that are expected to be permanently reinvested in the business. It is not currently practicable to estimate the tax liability that might be payable on the repatriation of these foreign earnings.

Exhibit 13 – Page 19

NOTE E LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:

(In thousands)	December 31, 2005		January 1, 2005
Industrial Development Bonds:
Due in 2013 at variable rate of 3.60%	$	2,025	$	2,025
Notes payable to banks:
Due October 25, 2006 at 3.62% fixed rate		25,000		25,000
Due September 30, 2009 at 4.63% fixed rate		15,000		15,000
Due January 31, 2007 at 4.93% variable rate		41,000		47,000
Due March 15, 2007 at 5.06% variable rate		12,000		15,000
		95,025		104,025
Less current maturities		25,000		—
	$	70,025	$	104,025

Certain long-term obligations are collateralized by property, plant and equipment with a net book value of approximately $0.6 million at December 31, 2005.

Maturities of long-term obligations for the five-year period ending 2010 are: 2006 - $25.0 million; 2007 - $53.0 million; 2008 - $0, 2009 - $15.0 million, 2010 and thereafter - $2.0 million. Amounts included in current maturities are related to a note payable to bank with an original maturity date of October 25, 2009, containing a first call provision at October 25, 2006, which the Company expects to be exercised.

Certain long-term obligations require that the Company maintain various financial ratios. These ratios were all met for 2005 and 2004. At December 31, 2005, the Company had outstanding letters of credit totaling $2.3 million that will expire between February 28, 2006, and July 1, 2006. The Company expects to renew these letters of credit prior to expiration.

Interest paid was $3.8 million in 2005, $3.0 million in 2004, and $2.9 million in 2003.

The Company has a credit facility with a bank that provides up to $60.0 million of borrowing capacity. At December 31, 2005, the Company had borrowings of $41.0 million under the facility. Borrowings are secured by all trade accounts receivables. The Company utilizes a wholly owned special purpose entity (“SPE”) to securitize the receivables. The SPE has no other purpose other than the securitization and is consolidated in the Company’s financial statements.

The Company had lines of credit aggregating $25.0 million available at December 31, 2005, with $12.0 million borrowed under these lines. Interest on lines of credit is at rates mutually agreed upon at time of borrowing.

NOTE F SHAREHOLDERS’ EQUITY

Shareholder Rights Plan

The Company maintains a shareholder rights plan intended to encourage a potential acquirer to negotiate directly with the Board of Directors. The purpose of the plan is to ensure the best possible treatment for all shareholders. Under the terms of the plan, one Common Stock Purchase Right (a Right) is associated with each outstanding share of common stock. If an acquiring person acquires 20% or more of the Company’s common stock then outstanding, the Rights become exercisable and would cause substantial dilution. Effectively, each such Right would entitle its holder (excluding the 20% owner) to purchase shares of Baldor common stock for half of the then current market price, subject to certain restrictions under the plan. A Rights holder is not entitled to any benefits of the Right until it is exercised. The Rights, which expire in May 2008, may be redeemed by the Company at any time prior to someone acquiring 20% or more of the Company’s outstanding common stock and in certain events thereafter.

Exhibit 13 – Page 20

Accumulated Other Comprehensive Income (Loss)

Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in shareholders’ equity are as follows:

	Unrealized Gains (Losses) on						Foreign Currency Translation Adjustments			Total Accumulated Other Comprehensive Income (Loss)
(In thousands)	Securities			Derivatives
Balance at December 29, 2002	$	181		$	(61	)	$	(5,000	)	$	(4,880	)
Net change 2003		(145	)		1,541			2,809			4,205
Balance at January 3, 2004		36			1,480			(2,191	)		(675	)
Net change 2004		(157	)		136			1,746			1,725
Balance at January 1, 2005		(121	)		1,616			(445	)		1,050
Net change 2005		(418	)		(1,044	)		(1,978	)		(3,440	)
Balance at December 31, 2005	$	(539	)	$	572		$	(2,423	)	$	(2,390	)

Share Repurchases

During 2005, the Company, pursuant to its stock repurchase plan, repurchased approximately 300,000 shares of its common stock for cash in the amount of $7.6 million. No shares were repurchased in 2004. During 2003, the Company, pursuant to its stock repurchase plan, repurchased 1.5 million shares for cash in the amount of $26.7 million.

NOTE G COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company leases certain computers, buildings, and other equipment under operating lease agreements. Related rental expense was $5.2 million in 2005, $6.1 million in 2004, and $6.6 million in 2003. Future minimum payments for operating leases having non-cancelable lease terms in excess of one year are: 2006 - $2.0 million; 2007 - $2.2 million; 2008 - $2.0 million; 2009 - $1.9 million; 2010 and thereafter - $5.9 million.

On July 21, 2005, the Company entered into a five-year operating lease agreement on a new facility in Columbus, Mississippi. Beginning in the fourth quarter of 2006, the Company will have annual operating lease commitments of approximately $850,000 related to the lease. The new facility will replace the Company’s existing facility in Columbus, Mississippi. During the construction period, the Company is acting as construction managers under a construction management agreement. In accordance with Emerging Issues Task Force (“EITF”) 97-10, “The Effect of Lessee Involvement in Asset Construction”, during the construction period, the Company has a maximum guarantee of 89.9% of the construction costs to date. As of December 31, 2005, the construction costs to date are approximately $5.4 million. As the likelihood of making any payments on this guarantee is remote, no liability has been accrued. As part of the lease agreement, the Company is subject to an 82% residual value guarantee at the end of the lease term in the event the value of the property has decreased. The maximum potential liability under the residual value guarantee would be approximately $13.6 million should the property become worthless by the end of the lease term. In accordance with Financial Interpretation (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, the Company has recorded a liability of approximately $393,000 classified in other liabilities, which represents the fair value of the guarantee, based on a probability-weighted calculation of the expected value of the property at the end of the lease term.

Exhibit 13 – Page 21

Legal Proceedings and Contingent Liabilities

The Company is subject to a number of legal actions arising in the ordinary course of business. Management expects that the ultimate resolution of these actions will not materially affect the Company’s financial position, results of operations, or cash flows. During the fourth quarter of 2004, certain contingent liabilities were adjusted by approximately $1.5 million to reflect current exposures, resulting in a reduction in selling and administrative expenses.

NOTE H EARNINGS PER SHARE

The table below details earnings per share for the years indicated:

	2005		2004		2003
Numerator:
Net earnings (in thousands)	$	43,021	$	35,052	$	24,779
Denominator Reconciliation:
Weighted average shares - basic		33,170,241		32,953,382		32,928,369
Effect of dilutive securities - stock options		557,705		531,879		476,364
Weighted average shares - diluted		33,727,946		33,485,261		33,404,733
Earnings Per Share - basic	$	1.30	$	1.06	$	0.75
Earnings Per Share - diluted	$	1.28	$	1.05	$	0.74

The total number of anti-dilutive securities excluded from the above calculations was approximately 452,100 at December 31, 2005, 192,000 at January 1, 2005, and 747,000 at January 3, 2004.

NOTE I STOCK PLANS

At December 31, 2005, the Company had various stock plans. Grants can and have included: (1) incentive stock options to purchase shares at market value at grant date, and/or (2) non-qualified stock options to purchase shares of stock equal to and less than the stock’s market value at grant date. Grants from the 1990 Plan expire six years from the grant date. All other grants expire 10 years from the date of grant. The 1987, 1989, and 1996 Plans have expired except for options outstanding. A summary of the Company’s stock plans follows.

1990 Plan — Only non-qualified options can be granted from this Plan. Options vest and become 50% exercisable at the end of one year and 100% exercisable at the end of two years. Shares authorized for grants: 1990 Plan - 501,600.

1987 and 1994 Plans — Incentive stock options vest and become fully exercisable with continued employment of six months for officers and three years for non-officers. Restrictions on non-qualified stock options normally lapse after a period of five years or earlier under certain circumstances. Related compensation expense for the non-qualified stock options is amortized over the applicable compensatory period. Shares authorized for grants: 1987 Plan – 2,700,000; 1994 Plan - 4,000,000.

1989, 1996 and 2001 Plans — Each non-employee director is granted an annual grant consisting of non-qualified stock options to purchase: (1) 3,240 shares at a price equal to the market value at grant date, and (2) 2,160 shares at a price equal to 50% of the market value at

Exhibit 13 – Page 22

grant date. These options are immediately exercisable and related compensation expense on the options granted at 50% of market is recognized at date of grant. Shares authorized for grants: 1989 Plan - 540,000; 1996 Plan - 200,000; 2001 Plan - 200,000.

	1990 Plan	1987 and 1994 Plans	1989, 1996 and 2001 Plans
Type	Non-compensatory	Compensatory	Compensatory
Administrator	Compensation & Stock Option Committee	Compensation & Stock Option Committee	Executive Committee
Recipients	District Managers	Employees	Non-employee Directors
Status	Active	Active - 1994 Plan Expired - 1987 Plan	Active - 2001 Plan Expired - 1989 & 1996 Plans

Options Outstanding at Fiscal Year-End	Granted at Market		Granted at Market		Granted at Less than Market		Granted at Market		Granted at Less than Market
Range of exercise prices		$17.06 - $24.75	$	14.44 - $27.60		$7.22 - $20.70		$15.38 - $24.81		$7.69 - $11.70
Options outstanding		104,052		1,927,155		215,601		169,776		79,711
Weighted-average exercise price	$	22.29	$	22.20	$	11.53	$	21.89	$	10.62
Weighted-average remaining contractual life		3.9 years		5.7 years		6.2 years		5.9 years		5.1 years
Options currently exercisable		57,552		1,237,115		214,601		169,776		79,711
Weighted-average exercise price	$	20.31	$	20.53	$	11.49	$	21.89	$	10.62

A summary of the Company’s weighted average variables, using the Black-Scholes option pricing model, and stock option activity for fiscal years 2005, 2004, and 2003 follows.

	2005					2004					2003
Weighted Average Variables
Volatility		1.0%					1.4%					2.0%
Risk-free interest rates		3.8%					4.0%					3.7%
Dividend yields		2.2%					2.3%					2.6%
Expected option life		5.2 years					7.5 years					6.7 years
Remaining contractual life		5.7 years					5.2 years					5.4 years
	Exercise Price			Fair Value		Exercise Price			Fair Value		Exercise Price			Fair Value
Per share price of options granted during year
At market price	$	27.05		$	1.87	$	23.85		$	2.34	$	20.27		$	1.45
At less than market price	$	13.63		$	7.59	$	11.70		$	6.14	$	10.11		$	4.55
Stock Option Activity	Shares			Weighted Average Price/Share		Shares			Weighted Average Price/Share		Shares			Weighted Average Price/Share
Total options outstanding
Beginning Balance		2,269,875		$	18.82		2,491,187		$	17.99		2,499,790		$	17.26
Granted		677,966			25.07		244,600			23.10		421,500			18.85
Exercised		(384,196	)		15.66		(404,793	)		15.79		(325,170	)		16.30
Expired		(67,350	)		22.97		(61,119	)		22.42		(104,933	)		19.13
Ending Balance		2,496,295			20.89		2,269,875			18.82		2,491,187			17.99
Shares authorized for grant		8,141,600					8,141,600					8,141,600
Shares exercisable, at year end		1,758,755			19.10		1,907,875			18.32		1,993,787			17.29
Shares reserved for future grants, at year end		668,845					1,280,867					1,466,348

Exhibit 13 – Page 23

NOTE J FOREIGN OPERATIONS

The Company’s foreign operations include both export sales and the results of its foreign affiliates in Europe, Australia, Far East, and Mexico. Consolidated sales, earnings before income taxes, and identifiable assets consist of the following:

(In thousands)	2005		2004		2003
Net Sales:
United States Companies
Domestic customers	$	618,476	$	547,092	$	479,414
Export customers		54,310		46,396		40,926
		672,786		593,488		520,340
Foreign Affiliates		48,783		54,707		41,051
	$	721,569	$	648,195	$	561,391
Earnings Before Income Taxes:
United States Companies	$	65,459	$	50,217	$	39,076
Foreign Affiliates		1,836		2,111		253
	$	67,295	$	52,328	$	39,329
Assets:
United States Companies	$	483,349	$	480,865	$	457,727
Foreign Affiliates		21,253		20,695		19,228
	$	504,602	$	501,560	$	476,955

NOTE K ACQUISITIONS

On October 11, 2005, the Company acquired the remaining 40% minority interest in its consolidated affiliate Australian Baldor Pty Limited for cash in the amount of $2.4 million. The acquisition has been accounted for as a purchase with resulting goodwill of approximately $258,000. The results of operations for the remaining 40% interest for the year ended January 31, 2005, were not material to the Company’s consolidated financial statements. Accordingly, pro forma information has not been presented. As of October 11, 2005, Australian Baldor Pty Limited is a wholly owned subsidiary of the Company.

On February 13, 2003, the Company acquired all of the stock of Energy Dynamics, Inc. (“EDI”) for cash in the amount of $5.8 million. EDI is a designer, assembler, and marketer of industrial generator sets. The acquisition has been accounted for as a purchase with resulting goodwill of approximately $5.8 million. EDI’s results of operations for the year ended January 3, 2004, were not material to the Company’s consolidated financial statements. Accordingly, pro forma information has not been presented. The Company’s consolidated financial statements include the results of operations and the assets and liabilities of EDI after February 12, 2003.

NOTE L RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board (the “FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs”. SFAS 151 is an amendment of Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing”. Among other items, SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In accordance with SFAS 151, such items must be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” and allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company is required to adopt SFAS 151 no later than January 1, 2006. Management does not expect adoption of SFAS 151 to have a significant impact on the Company’s financial statements.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. SFAS 123(R) is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes

Exhibit 13 – Page 24

Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. Among other items,

SFAS 123(R) eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. In accordance with SFAS 123(R), the cost will be based on the grant-date fair value of the award and will be recognized over the period for which an employee is required to provide service in exchange for the award. Baldor will adopt SFAS 123(R) on a modified prospective basis beginning January 1, 2006. While the Company is currently evaluating the impact SFAS 123(R) will have on its financial results, management does not expect the impact to differ materially from the pro forma disclosures currently required by SFAS 123 and described herein under “Stock-based Compensation”.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS 154 replaces APB No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. Among other items, SFAS 154 applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The Company’s adoption of SFAS 143 on January 1, 2006, is not expected to have a significant effect on the financial statements.

Exhibit 13 – Page 25

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors, Baldor Electric Company and Affiliates

We have audited the accompanying consolidated balance sheets of Baldor Electric Company and Affiliates as of December 31, 2005, and January 1, 2005, and the related consolidated statements of earnings, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldor Electric Company and Affiliates at December 31, 2005, and January 1, 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Baldor Electric Company and Affiliates’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2006 expressed an unqualified opinion thereon.

\s\ Ernst & Young LLP

Tulsa, Oklahoma

February 22, 2006

Exhibit 13 – Page 26

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors, Baldor Electric Company and Affiliates

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control over Financial Reporting, that Baldor Electric Company and Affiliates maintained effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Baldor Electric Company and Affiliates’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Baldor Electric Company and Affiliates maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, Baldor Electric Company and Affiliates maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Baldor Electric Company and Affiliates as of December 31, 2005, and January 1, 2005, and the related consolidated statements of earnings, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2005, and our report dated February 22, 2006 expresses an unqualified opinion on these statements.

\s\ Ernst & Young LLP

Tulsa, Oklahoma

February 22, 2006

Exhibit 13 – Page 27

Report of Management on Responsibility for Financial Reporting

Management is responsible for the integrity and objectivity of the financial information contained in this annual report. The accompanying financial statements have been prepared in conformity with accounting standards generally accepted in the United States, applying informed judgments and estimates where appropriate.

The Audit Committee of the Board of Directors is composed solely of outside directors and is responsible for recommending to the Board the independent registered public accounting firm to be retained for the coming year. The Audit Committee meets regularly with the independent registered public accounting firm, with the Director of Audit Services, as well as with Baldor management, to review accounting, auditing, internal accounting controls, and financial reporting matters. The independent registered public accounting firm, Ernst & Young LLP, and the Director of Audit Services have direct access to the Audit Committee without the presence of management to discuss the results of their audits.

/s/ John A. McFarland

JOHN A. MCFARLAND

Chairman and Chief Executive Officer

/s/ Ronald E. Tucker

RONALD E. TUCKER

President, Chief Financial Officer and Secretary

Exhibit 13 – Page 28

Report of Management on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). We maintain a system of internal controls that provide reasonable assurance that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States and that assets are safeguarded from unauthorized use or disposition.

We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included review of the documentation of controls, assessment of the design effectiveness of the controls, testing of the operating effectiveness of controls, and a conclusion on this assessment. Although there are inherent limitations in the effectiveness of any system of internal controls over financial reporting, based on our assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2005. Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on management’s assessment of internal control over financial reporting, which is included in this report.

/s/ John A. McFarland

JOHN A. MCFARLAND

Chairman and Chief Executive Officer

/s/ Ronald E. Tucker

RONALD E. TUCKER

President, Chief Financial Officer and Secretary

Exhibit 13 – Page 29

Dividends Paid

Baldor’s annual dividend rate for 2005 increased 9% percent over the 2004 rate. There have been three dividend increases in the last five years and 10 increases in the last 10 years.

	2005		2004		2003
1st quarter	$	0.15	$	0.14	$	0.13
2nd quarter		0.15		0.14		0.13
3rd quarter		0.16		0.14		0.13
4th quarter		0.16		0.15		0.14
Year	$	0.62	$	0.57	$	0.53

Ticker

The common stock of Baldor Electric Company trades on the New York Stock Exchange (NYSE) with the ticker symbol BEZ.

Common stock price range

As reported by the NYSE, the high and low composite sale prices per share for the Company’s common stock for each quarterly period during the past two fiscal years is listed below.

	2005				2004
	HIGH		LOW		HIGH		LOW
1st quarter	$	28.35	$	25.18	$	24.70	$	22.18
2nd quarter		26.63		23.81		24.21		21.90
3rd quarter		26.47		22.70		24.35		21.32
4th quarter		27.02		23.19		28.75		22.65

Shareholders

At December 31, 2005, there were 4,592 shareholders of record including employee shareholders through participation in the benefit plans.

Certifications

The Company has filed the Chief Executive Officer and Chief Financial Officer certifications required by Section 302 of the Sarbanes-Oxley Act in its Form 10-K. Additionally, the Chief Executive Officer has provided the required annual certifications to the New York Stock Exchange.

Exhibit 13 – Page 30

EX-21

EXHIBIT 21

BALDOR ELECTRIC COMPANY AND AFFILIATES

SUBSIDIARIES OF THE REGISTRANT

NAME OF SUBSIDIARIES	LOCATION
Baldor of Arkansas, Inc.	Arkansas
Baldor of Nevada, Inc.	Nevada
BEC Business Trust	Massachusetts
Baldor of Texas, L.P.	Texas
Baldor International, Inc.	U.S. Virgin Islands
Southwestern Die Casting Company, Inc.	Arkansas
Baldor UK Holdings, Inc.	Delaware
Baldor UK Ltd	United Kingdom
Baldor Holdings, Inc.	Delaware
Baldor de Mexico, S.A. de C.V.	Mexico
Baldor ASR AG	Switzerland
Baldor ASR GmbH fur Antriebstechnik	Germany
Baldor ASR U.K. Limited	United Kingdom
Baldor Italia S.r.l.	Italy
Australian Baldor Pty Limited	Australia
Baldor Electric (Asia) PTE, Ltd.	Singapore
Northern Magnetics, Inc.	California
Baldor Japan Corporation	Japan
Baldor Investments, LLC	Delaware
Pow’R Gard Generator Corp.	Wisconsin
Energy Dynamics, Inc.	Wisconsin
Baldor Power Finance, Inc.	Wisconsin
Baldor Electric India Pvt Ltd	India

EX-23.(I)

EXHIBIT 23 (i)

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Annual Report (Form 10-K) of Baldor Electric Company and Affiliates of our reports dated February 22, 2006, with respect to the consolidated financial statements of Baldor Electric Company and Affiliates, Baldor Electric Company and Affiliates management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Baldor Electric Company and Affiliates included in the 2005 Annual Report to Shareholders of Baldor Electric Company and Affiliates.

Our audits also included the financial statement schedule of Baldor Electric Company and Affiliates listed in Item 15(a). This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We consent to the incorporation by reference in the following Registration Statements:

1. Registration Statement (Form S-8, No. 33-16766) pertaining to the Baldor Electric Company 1987 Incentive Stock Plan

2. Registration Statement (Form S-8, No. 33-28239) pertaining to the Baldor Electric Company Employee Savings Plan

3. Registration Statement (Form S-8, No. 33-36421) pertaining to the Baldor Electric Company 1989 Stock Option Plan for Non-Employee Directors

4. Registration Statements (Forms S-8, No. 33-59281, No. 33-60731, and No. 333-62331) pertaining to the Baldor Electric Company 1994 Incentive Stock Plan

5. Registration Statement (Form S-8, No. 333-33109) pertaining to the Baldor Electric Company 1996 Stock Option Plan for Non-Employee Directors

6. Registration Statement (Form S-8, No. 333-33287) pertaining to the Baldor Electric Company Employees’ Profit Sharing and Savings Plan

7. Registration Statement (Form S-8, No. 333-67474) Stock Option Plan for Non-Employee Directors

of our reports dated February 22, 2006, with respect to the consolidated financial statements of Baldor Electric Company and Affiliates, Baldor Electric Company and Affiliates management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Baldor Electric Company and Affiliates, incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule of Baldor Electric Company and Affiliates included in the Annual Report (Form 10-K) of Baldor Electric Company and Affiliates.

/s/ Ernst & Young LLP

Tulsa, Oklahoma

March 6, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John A. McFarland, certify that:

(1) I have reviewed this annual report on Form 10-K of Baldor Electric Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 9, 2006	By:	/s/ John A. McFarland
		John A. McFarland
		Chief Executive Officer
		of Baldor Electric Company

EX-31.2

EXHIBIT 31.2

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ronald E. Tucker, certify that:

(1) I have reviewed this annual report on Form 10-K of Baldor Electric Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period for which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 9, 2006	By:	/s/ Ronald E. Tucker
		Ronald E. Tucker
		Chief Financial Officer
		of Baldor Electric Company

EX-32

EXHIBIT 32

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Baldor Electric Company (the “Company”) on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. McFarland, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 9, 2006	By:	/s/ John A. McFarland
		John A. McFarland
		Chief Executive Officer
		of Baldor Electric Company

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Baldor Electric Company (the “Company”) on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ronald E. Tucker, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 9, 2006	By:	/s/ Ronald E. Tucker
		Ronald E. Tucker
		Chief Financial Officer
		of Baldor Electric Company